Why Successful Investors Always Write a Business Plan

Successful investors have many
traits in common. Vision is the clearest and most important among
these traits when it comes to putting a deal together. A business plan is the
tangible representation of an investor’s vision. This document aligns the team
and sets the tone for the broader investment lifecycle.

Investors approach business planning in different ways. Some
have a very strict process that includes in-depth analysis and requires
mountains of supporting materials. Other investors are satisfied with a simple
document that explains where the property is today, the vision for the future
state, and how to get there.

Regardless of your approach, a business plan has tremendous
value for taking the property from here to there.

The Value of Planning

Everyone has a different relationship with planning. Most
people put together rough plans that highlight critical points and leave it at
that. However, the spectrum ranges from those that absolutely abhor planning
and those that lose themselves in the practice. A nice balance exists in the
middle, where the plan doesn’t take too much time and adds value to the
execution. This balance can be elusive.

Purpose drives the content, depth, breadth, and spirit of
your plan, and it is the key to finding value in writing one.

Your business plan becomes more when it’s developed with
your audience in mind. Its value extends beyond being a repository of your own
thoughts and notes to a map of the investment lifecycle.

Clarify Critical Points

Every real estate investment plan should answer one
important question – “What do we do with it?”

Operating pro formas, renovation scope and budget, and
investment returns are meaningless without a clear definition of the current
state of the property and desired future state. This is the catalyst that
starts a chain of related clarifying points.

A vision without appropriate communication dies a slow and
painful death in your execution.

The execution plans that emerge from a solid business plan
are the foundation effective team communication. Artifacts include investment
and lending marketing packages, tactical plans, and tracking and reporting.

These derivative works help you direct projects embedded
within the broader plan. Therefore, clarity is of utmost importance to maintain
consistency and fidelity throughout the execution process.

Team Alignment

One cannot achieve business success in a vacuum. It requires
the collaboration and alignment of internal and external stakeholders to
perform according to clearly defined expectations.

Your business plan and its derivatives build this alignment
by clearly and transparently outlining the objectives and proposed execution.
However, the plan alone offers nothing by way of action.

Internal stakeholders are easy to identify. Most investment
teams are small, and stakeholder involvement in different areas of the business
discretely defines their roles.

External stakeholders are abundant and impossible to
completely identify at the planning stages. They include financial partners,
government entities, vendors, customers, and community players. Each has different
needs and desires from dealing with you and your property, and none of them can
be satisfied with a catch-all tactical strategy. Therefore, values and
principles are crucial to encapsulating the spirit of the business plan.

Team alignment is more about the spirit of the plan than the
tactical approach. While you may have a high level of control over your
internal team, the external stakeholders that drive 90% of your success are
completely out of your control. This means you need to build a culture that
will address those demands with consistency throughout the investment
lifecycle.

From Plan to Execution

All your hopes, dreams, and aspirations materialize through
your team’s diligent efforts after you close. However, the business plan rarely
anticipates and mitigates all the risks that arise when it comes to execution.

Communication mediums, like a written business plan, are
only as good as the final written word. They don’t encapsulate and convey all
the tangential discussions and rejected ideation that went into preparing the
document. That peripheral activity only lives with the people that were part of
its creation.

The value of your planning process is directly related to
the number of people you involved.

Execution depends on culture. An inclusive, transparent
culture is messy and conflict-ridden. However, it is also efficient and fair.
Problems emerge and the best person for the job self-selects into solving them.

This is in stark contrast to an exclusive, opaque culture,
which puts on a strong front of order and harmony. However, inefficiency,
unsolved problems, and wasted talent fill the environment beneath the surface.

Business Plan Structure

A business plan can be as informal as a bar napkin outlining
all the salient points, but that usually won’t pass muster for banks and
investors. On the other end of the spectrum, you could spend weeks drafting a
comprehensive plan that accounts for every eventuality. However, that could be
time wasted as it could never fully capture all the risks in a hotel
investment.

Balance between complexity and simplicity is the most
challenging task in drafting a high-quality hotel investment plan. Your
audience and partners in the plan will drive the content, and a general
structure hitting all the major points goes a long way to making this a task
more manageable.

The framework below follows a process that builds the
business plan organically. These may not be the headings and order that your
final plan follows. Still, the flow takes you from where the property is today,
what you do with it, and the expected outcome.

Property Information / Current State

The built environment is the first area to consider in describing
a property. This includes the grounds, exterior, common spaces, rooms, and
building systems that you evaluate
during a property tour. However, the operations and contract
positioning are of critical importance in establishing the current state.

Each property has its attributes and challenges. Your
business plan amplifies the attributes and mitigates the challenges. A SWOT
analysis – strengths, weaknesses, opportunities, and threats – is the most
appropriate tool for this job.

Two factors drive a SWOT analysis – status and locus of
control. The status defines whether something is an attribute or challenge, and
the locus of control defines where these emanate from.

Strengths – attribute generated from an internal
source

Weakness – challenge generated from an internal
source

Opportunities – attribute generated from an
external source

Threats – challenge generated from an external
source

This analysis lays the foundation of the necessity for structural
or operational changes.

Market positioning is also a major part of this section.
This describes the size and composition of demand entering the market along
with competitive supply that would reduce or challenge your fair share of that
demand.

Major demand generators and sales targets are drive your
operational plan. A discussion on how the hotel performs now is important to
understand what changes on-property will win the business you expect under new
ownership.

Renovation Scope

A brand-mandated property improvement plan (PIP) drives many
of the renovation decisions in your property. Still, there is ample flexibility
in both negotiating the finer points of that PIP and expanding it to meet the
apparent needs and desires of your target guest.

Return on investment may be your primary focus, but brand
consistency drives much of the PIP.

Every construction project deals with three competing
demands – quality, speed, and cost. Each of these has its own benefits, but you
can only combine two and sacrifice the third. For example, you can have it fast
and cheap, but quality will suffer. Similarly, resource constraints make it
expensive to deliver a high-quality product quickly.

Align the renovation scope with your expected investment
time period. Some projects, like systems replacements, may be good to complete
under an already disrupted guest experience. However, the remaining useful life
determined by your property condition assessment (PCA) may not justify such a
project at that time.

Establish and defend the credibility of your renovation
scope with a firm budget and supporting materials from PIP and PCA
investigations.

Operating Plan

A hotel operating plan encompasses two parts revenue
management and one part yield management.

Your management company will drive the bulk of the operating
plan, which includes pro forma operating budgets, revenue segmentation,
contract positioning, and other financial aspects of the business plan.
However, human capital remains the most critical piece of the operating plan.

Most human capital plans simply lay out the organizational
chart and clarify who stays and who goes, but culture has an enormous impact on
revenue and bottom line performance. The management company inspires the
property culture, but the people on the front line are responsible for creating
it.

The financial aspect of your business plan is simple. These
are copy and paste tables and analysis from your financial model. Targeted property
culture requires some creativity and prose. It’s more art than science.

You may be thinking, “what’s the point? The management
company has manuals, systems, and processes for all this stuff.”

You’re right; they do. However, you are responsible for
selecting and overseeing the management company. You should expect that their
mission for the property aligns closely with your vision. The only way to do
that is to clearly define that vision at the outset. Don’t leave this to
chance.

Timeline

Most commercial real estate investments can realize their
value enhancement within a year or two. A Big Four CRE investor can sell a
well-tenanted retail, office, or industrial asset at a higher valuation
immediately upon signing the last lease. Similarly, a fully-occupied apartment
building can maximize its value quickly by stabilizing the rent roll with higher
quality tenants.

Hotels are different. They take more time to stabilize.

A solid hotel business plan requires the property to
position itself in the market as the leader for its target guest. A robust
sales and marketing approach paired with time-tested revenue management and
business segmentation make this possible.

The investment timeline gets longer when you add renovations
that disrupt the guest experience and increases the effort to recover guest
loyalty thereafter.

Most select service hotels can bounce back and start
realizing enhanced returns from a repositioning strategy within two to three
years. Full service hotels take longer to recover because they have more rooms
to sell and function space fills up with longer lead-time guests.

Consider, also, how your renovation and operational
timelines align with preferred capital structures. Most deep value-add deals
will benefit from the flexibility of a bridge loan, while stabilized assets
would benefit from more affordable bank or CMBS loans. These each have
different timing and performance expectations.

Capital Structure

A real estate investment discussion would be incomplete
without touching on OPM.

The most successful investors always
use financial leverage in their deals. Debt and equity structures
allow sponsors to invest in more and larger deals by trading their expertise
and hard work for lower equity investment and more favorable investment
returns.

Diversity of relationships in the capital markets allows you
to approach a more diverse field of deals.

A business plan that conceives of a core plus acquisition
would not fit with investors seeking value-add and opportunistic returns. The hold
time frame, risk profile, and return expectations would fall flat. Further, you
risk alienating those contacts if you consistently present deals that don’t fit
their investment objectives.

Your business plan (at least the major points) should
precede sourcing capital for a deal.

This document will serve to clarify the objectives and
answer most questions a potential investor or lender may have about the deal.
Similarly, the contents of the business plan will contain content that
transfers easily to investment and lender marketing materials.

A target capital structure also forms the foundation of your
deal sales and marketing approach. In this section, you will define the type of
capital that fits for your deal and how you plan to fill the capital stack at
acquisition and through the investment lifecycle. Many leave this to chance, but
a targeted strategy pays off in enhanced productivity.

Investment Returns

The pièce de ré·sis·tance remains – investment returns.

Real estate investing involves tremendous risk, and hotel
operations amplify that risk by multiples. A financial model provides a nice
goal, but the returns will rarely materialize as projected. Therefore, every
business plan should present base, optimistic, and pessimistic scenarios that
account for the potential risks and opportunities that would, respectively, challenge
or enhance the returns.

This section doesn’t have to take up a lot of time and energy,
but it’s helpful to present the potential for gain or loss along with
strategies to produce or mitigate those eventualities.

Relevance is another consideration. Your investment and
lending partners are interested in different investment return metrics. Lenders
would be looking for debt service coverage and debt yield, while investors are
most interested in cash return and IRR.

Include different discussions for each potential capital
source and how your deal meets their expected needs and desires. This will make
your life much easier when you start building marketing materials and answering
questions about the merits of your deal.

Executive Summary

The executive summary always comes first in your business
plan, but it should always be the last section written.

Writing your executive summary first is a complete waste of
time. This section summarizes and condenses the most important points in your
business plan to a brief two to three-page digest. You compile it by copying,
pasting, and modifying content from your document.

Think of the audience. If they were to pick up this document
and have a short window to get the gist, what would they want to read about?

You will build many derivative works from this business
plan, and this section is good practice in pulling out and distilling the
important bits of information for those future documents.

Business Plan Derivatives

A well-written business plan is the cornerstone of your investment
execution and is the parent of myriad child documents. These documents serve
you in every stage of the investment lifecycle from contract to close, through
any repositioning, and on to sale. They establish the asset management cadence
and inspire every stakeholder to fall in line with their role.

Business plan derivatives below are the most apparent from
each stage of a hotel investment. This parent document is the constitution for
your deal. It should direct all major decisions, and its spirit should add
clarity in the case of unexpected risks.

Investment and Lending Package

Capitalization is the most pressing concern when you win a
deal. You spend loads of time, money, and energy on due diligence, third party
reports, and legal work. These costs add up quickly and easily become a stress
point until you find the financial backing to close the deal.

Equity and debt sources are generally interested in the same
information – background on the property, sponsor quality, and your investment plan.
However, their interests diverge on distribution of cash flows.

Lenders are most interested in the property’s ability to
cover periodic payments. In-place and projected cash flow is most critical even
though value enhancement is still important.

Investors, on the other hand, have a dual interest in cash
return and value creation. Real estate investments are unique among all other investment
types to produce a reliable dividend along with predictable strategies for increasing
value.

Disclosure is the name of the game here.

Financial projections are of utmost importance, but you
shouldn’t skimp on the property and market information. The more questions you
answer up front, the better. Questions arise from the perception that you might
be hiding something or that you didn’t consider all the risks.

Team Breakout Plan

Every stakeholder has an important role in a hotel
investment’s success. They know this intuitively and want to pitch in wherever
they can, but too many times, they don’t get the appropriate instructions on
what to do to be successful.

Sponsors come in with the expectation that professionals
know exactly how and where to fit in. However, each deal has its unique traits
that make it different enough to require clarification of each person’s roles and
responsibilities upon inception.

A team kick-off meeting is a time-honored tradition in every
project undertaking. Budgets, schedules, accountability charts, and other
project management artifacts are diligently distributed and filled in. Still,
the vision and mission for each project in the investment lifecycle remains the
most important charge.

Vision and mission along with an understanding of where the
project fits in the overall business plan helps unify the team. It empowers
them with a sense of ownership over their contribution to something greater.

Most team members will not need to see the entire business
plan, but it is important to share enough to build that camaraderie around a
shared objective.

Tracking and Reporting

Transparency is the cornerstone of trust. And trust is
essential for sustainable long-term and fruitful relationships.

Your business plan and its derivatives set a variety of
expectations within the hearts and minds of your stakeholders. Of course, the
financial stakeholders – lenders and investors – have clear, contractual
reporting requirements, but everyone else also benefits from routine updates on
how the investment is tracking toward its goals.

An open book can cause apprehension in difficult times, and
information management becomes important. Still, weigh this cost against the
benefits of an engaged and motivated team that comes together to persist beyond
the challenges.

Financial objectives are easy to track. They appear
concretely on a regular basis. However, the abstract performance drivers that
produce those financial results are more difficult to measure.

Choose two or three areas of the business plan to focus on each
quarter. Keep the ones that work and build a system around them. Ditch the ones
that don’t and move on to the next.

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